A Closer Look at the U.S. Household Debt Burden

Navigator Edition: January/February 2013
By: Jeffrey Kalski

Since the Great Recession, the U.S. consumer has been put under the microscope in an attempt to understand the “New Normal.”  One of the more popular topics has been the notion that households are deleveraging in the aftermath of the housing bubble and the collateral damage it caused to the economy and consumer sentiment. Data from the Federal Reserve’s Flow of Funds Accounts of the United States shows a significant decline in the percentage of debt held by households relative to disposable income. The debt to disposable income ratio hit its peak of 138%1 in Q4 2007 but has since dropped to 112% in Q3 2012, its lowest point since the Great Recession. Recessions tend to force consumers to rethink the way they handle their finances. However, there have been mixed signals on the extent of true deleveraging considering that defaults on mortgages, credit cards, and other consumer loans hit record highs and account for a significant portion of the overall decline in consumer debt since 2008.

Figure 1: Household Debt1 as a % of Disposable Income
1Includes non-profits.
Note: Historical quarterly figures may not reflect restatements.
Source: Federal Reserve, First Annapolis Consulting analysis.

According to the National Delinquency Survey conducted by the Mortgage Bankers Association, the serious delinquency rate, measured as the percentage of mortgage loans that are 90 days or more past due or in the process of foreclosure, reached a high of 9.67% in Q4 2009, 264 basis points higher than Q3 2012. The S&P / Experian consumer credit default index, a composite index of auto, credit and mortgage defaults, hit a high of 5.51% in May 2009 but has now dropped to 1.46%2. Credit card issuers experienced widespread spikes in loss rates hitting record highs in the 2009-2010 timeframe. So, according to these statistics, even as consumers began to demonstrate a greater sense of fiscal responsibility post-Great Recession, a large portion of household deleveraging can be attributed to defaults on loans, such as mortgages and credit cards. In fact, according to economists and various industry articles, about two-thirds of household deleveraging can be attributed to such defaults. Mustafa Akcay, an economist at Moody’s, says that “nearly 80% of deleveraging is caused by defaults,” while the remaining 20% is caused by “voluntary deleveraging,” (i.e., consumers paying down debts faster than they borrow). Karen Dynan, VP and Co-Director of Economic Studies at Brookings, stated that “the dollar volume of such defaults since the beginning of the financial crisis is about two-thirds as large as the total decline in household debt.”

Figure 2: Household Debt Balance by Type
1∆ from Q3 2008 to Q3 2012 YoY.
Note: Yearly totals differ from figures referenced in above line graph.
Source: FRBNY Consumer Credit Panel, Equifax.

If the majority of the household debt decline over the past five years was due to loan defaults, then it is safe to say that the larger part of the “deleveraging” process is over. While some economists, such as Nathan Sheets of Citigroup, contend that debt as a share of disposable income will continue to fall as households further deleverage (Sheets forecasts the ratio to drop to about 1:1, or 100%), many economists agree that consumers are poised to again make long-deferred purchases on credit. As household balance sheets were boosted by a surge in stock prices and early signs of housing market stability, household net worth as a percentage of income rose from 477% in Q1 2009 to 527% in Q2 20123. It is clear that loan defaults played a large role in the statistical measures related to a lower debt burden since the credit crisis.  Credit tightening and consumer caution also contributed.  However, going forward, the degree to which consumers have truly become more fiscally prudent remains to be seen especially in light of early signs of stability in the housing market, momentum in the stock market, and record low interest rates.

1 May not reflect restatement of quarterly figures.
2 Standard and Poors.
3 Bloomberg BusinessWeek.

For more information, please contact Jeffrey Kalski, Analyst specializing in Credit Card Issuing,

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